Firm Fined $20 Million for Stock Buyback While in Possession of Material Nonpublic Information

 

The SEC fined a public company $20 Million for conducting a stock buyback while in possession of material nonpublic information about its pending acquisition.  The CEO instructed the CFO to conduct the buyback, pursuant to a previous Board authorization, and the legal department approved the repurchase plan.  However, nobody asked the CEO about his pending merger negotiations, which constituted material nonpublic information.  The SEC faults the firm for failing to implement adequate internal controls which should include “conferring with persons reasonably likely to have potentially material information regarding significant corporate developments.”

This case serves as a warning for closed-end funds executing tender offers as well as private equity firms buying or selling portfolio companies.  As fiduciaries and insiders with greater access to information, closed-end funds and PE firms must ensure sufficient due diligence and documentation to defend any future claims that they hoodwinked their counterparties by failing to share material information.   One simple solution is to send a questionnaire to all executives asking if they know about any significant transactions or information.